Australia, much like most of the developed world has recently experienced a very large correction of the share prices of its technology companies. That correction now looks to be retracing back upwards, as a drop of up to 50% in value in many of best and largest technology companies, all the way down to the smaller listed entities, looks to be a significant oversell. Companies like Afterpay that have never made a profit and don’t have any in sight, cannot be worth close to a Big 4 Bank making billions in profit. But is Afterpay really only worth half of what the market thought it was worth 3 months ago? That cannot be right. But that is usually how corrections work, the prices were too high, the pendulum swings back the other way too far, and eventually settles on a reasonable middle ground.
Where does Investment capital go when it flows out of the technology stocks? It has done the so called ‘flight to quality’. Funds move from investments in speculative stocks like Afterpay, that are only expected to grow into big profits in many years, to sectors with proven profits such as banking and mining.
There is a less talked about flight to quality that is happening within the Australian technology sector itself. The investment banks and sophisticated capital start to line up for the technology companies that have good fundamentals. Those are the companies that have hit profitability already or their business models show they will be profitable very shortly. These companies do have high growth that is expected of fast scaling technology companies, but its not all about growth it’s about profitability also. In short, a good balance.
Top of every investment bank’s wish list to IPO is Canva, the graphic design platform. This company is reported to be growing faster and faster the larger it gets, but has also been profitable for a while already. The world’s most valuable private company is obviously the big fish target you’d expect many banks would be fighting for. However, it isn’t clear when Canva will be convinced to list on the exchange, and that likely will end up being on a big exchange like the NASDAQ. The picture here is more nuanced though because Canva’s valuation has gotten so large, the banks do worry if the market will justify such a valuation on listing. So where is the real money to be made, for sophisticated investors in tech stocks?
Where the real golden opportunity for investment being fought over is in smaller companies, with good fundamentals. Not too small, not those that get no attention but those that are likely to list into the bottom of the ASX200 and grow from there. That is the quality the investment banks are really fighting for. An example of this is BizPay the business invoice Buy now Pay Later leader. The business invoicing market size is in the trillions of dollars, and BizPay which is reportedly growing extremely fast is understood to be expected to be profitable by 2023, within a year after its proposed listing later this year. Word on the street is that many of the top investment banks including the bulge brackets are trying to cozy up to win the rights to run this IPO. This is the kind of investment where the sophisticated money will go. The quality within the sector.
